This week has been one where we have found ourselves observing and analysing the both the reality and the consequences of the global economic slow down. Yesterday gave us an opportunity to peer into the mind of a Bank of England policymaker and first Gertjan Vlieghe was keen to establish why he is paid the big bucks.
When the global economy is doing well, the UK usually tends to do well too. When the global economy is
sluggish, the UK economy tends to be sluggish too.
Thanks for that Gertjan! Next comes something that has been an issue since the credit crunch hit which has been the issue of what David Bowie called ch-ch-changes.
We are in a period of unusual uncertainty around the economic outlook.
There is a tendency to say every quarter that things are more uncertain than before, and of course that
cannot always be true. It must be that sometimes uncertainty is less than it was before.
Now put yourself in Gertjan’s shoes as someone who has been consistently wrong and has turned it into something of an art form. The future must be terrifying to someone like that and indeed it is.
Setting monetary policy requires making decisions even when the outlook is uncertain.
Actually the outlook is always uncertain especially if we look back for Gertjan and his colleagues.
The Forward Guidance Lie
Here is Gertjan making his case.
Rather, we need to respond to news about the economy as
we receive it, in a systematic and predictable way that agents in the economy can factor into their decisions.
There are several problems with this. Firstly how many people even take notice of the Bank of England. Secondly that situation will have only have been made worse by the way that the Forward Guidance has not only been wrong it has been deeply misleading, For example in August 2016 after more than two years of hints and promises about a Bank Rate rise Gerthan voted instead for a Bank Rate cut and £60 billion of Sledgehammer QE. So those who had taken the Forward Guidance advice and for example remortgaged into a fixed-rate were materially disadvantaged.
Not content with that Gertjan seems on the road to doing it again. So let us remind ourselves of the official view.
The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.
Yet Gertjan has got cold feet again.
I will discuss what news we have had about the economy in recent quarters, and how that has changed my
thinking about the appropriate path of monetary policy.
Why do I have a feeling of deja vu? Here is the old Vlieghe.
When I first spoke about the future path of Bank Rate a year ago, I thought one to two quarter point hikes per
year in Bank Rate was the most likely central case
Here is the new Vlieghe.
On the assumption that global growth does not slow materially further than it has so far, that the path to Brexit
involves a lengthy transition period in line with the government’s stated objectives, that pay growth continues
around its recent pace, and that we start to see some evidence of pay growth leading to upward consumer
price pressure, a path of Bank Rate that involves around one quarter point hike per year seems a reasonable
As you can see Gertjan is trying to present himself in the manner of an engineer perhaps fine tuning an aircraft wing design. The first problem is that last time he tried this his aircraft crashed on take-off as a promised Bank Rate rise turned into a cut. Next comes the issue of why you would raise Bank Rate once a year? After all it would feel like forever before anything materially changed. Five years of it would get Bank Rate to only 2%!
The reality is that if we look at his view of a slowing world economy it is hard to believe that he wants to raise interest-rates at all. Also as his speech is very downbeat about Brexit as the Bank of England consistently is then it is hard not to mull what he told the Evening Standard back in April 2016.
“Theoretically, I think interest rates could go a little bit negative.”
Even that was an odd phrase as of course quite a few countries had them including the country where he was born. Anyway here is my immediate response on twitter to his speech.
Shorter Gertjan Vlieghe : Can I vote for a Bank Rate cut yet please Governor?
If we step back and look at the overall Bank of England picture we see that the Monetary Policy Committee is becoming an increasing waste of time. We are paying eight people to say “I agree with Mark” and flatter the Governor’s ego.
Here Gertjan Vlieghe had almost impeccable timing.
Domestic growth has slowed somewhat more than expected, especially around the turn of the year.
Just in time for this official release today about UK Retail Sales.
Year-on-year growth in the quantity bought in January 2019 was 4.2%, the highest since December 2016; while year-on-year average store prices slowed to 0.4%, the lowest price increase since November 2016.
Those figures confirm my theme that lower inflation leads to better consumption data via higher real wages. This is a very awkward issue for the Bank of England as it wants to push the 0.4% inflation above up to 2% in what would be a clear policy error.
In the three months to January 2019, the quantity bought increased by 0.7% when compared with the previous three months.The monthly growth rate in the quantity bought increased by 1.0% in January 2019, following a decline of 0.7% in December 2018.
A good January has pulled the quarterly numbers higher and the driving force is show below.
The quantity bought in textile, clothing and footwear stores showed strong year-on-year growth at 5.5% as stores took advantage of the January sales, with a year-on-year price fall of 0.9%.
This speech just highlights what a mess the situation has become at the Bank of England. A policymaker gives a speech talking about interest-rate rises whilst the meat of the speech outlines a situation more suited to interest-rate cuts. The economy is smaller due to Brexit morphs into world economic slow down and yet Gertjan apparently thinks we are silly enough to believe he intends to raise interest-rates. Even in a Brexit deal scenario he doesn’t seem to have even convinced himself.
If a transition period is successfully negotiated, and a near term “no deal” scenario is therefore avoided, I
would expect the exchange rate to appreciate somewhat. The degree of future monetary tightening will in
part depend on how large this appreciation is.
Also 2018 taught us how useful the money supply data can be in predicting economic events and yet they have been ignored by Gertjan as we see a reason why he is groping in the dark all the time. That brings me to my point for today which is that the Bank of England has become one big echo chamber with a lack of diversity in any respect but most importantly in views. External members are supposed to bring a fresh outlook but this has failed for some time now. So it would be simpler if we saved the other eight salaries and let Governor Carney set interest-rates as really all they are doing is saying “I agree with Mark”. After all even the Bank of Japan with its culture of face manages to produce some dissent these days.